Left: U.S. gross domestic product, 1st quarter revised to -0.7% from +0.2%. Source: Commerce Department
The US remains Israel’s most important market, but its economic recovery is stalling.
In recent years the Israeli government and the Israeli private sector have been very busy diversifying export markets and sources of financing and investment. They have concentrated on South Asia and the Far East, especially but not only India, China, Japan, South Korea and Taiwan. These countries and others have proven to be vital resources for the Israeli economy and in the case of China, an eager participant in joint educational projects as well.
This is all to the good and should be encouraged to continue. Nevertheless, Europe and the United States remain the major export markets for Israeli goods and important sources of financing and investment. Consequently, the state of the European and American economies is of fundamental importance to Israel’s economic future, at least in the near term.
The European economic/financial situation is well-known and depressing: relative stagnation in most countries, the eternal Greek debt crisis, the possibility of a British exit from the European Union and so forth. Less attention has been paid to the current situation in The United States. The general impression, with a strong dollar and booming financial markets is that the American economy is recovering nicely from the “Great Recession”.
Would that it were true. The facts are very different and much less positive, as underlined by the 0.7% decline in GDP in the first quarter of this year. Much of the previous growth was centered on investment in the energy sector, especially due to technological developments in oil and gas extraction (“fracking”). In a very short span of years as a result of the applications of these technologies, the US became gas self-sufficient and oil production soared for the first time in four decades, making the US the world’s largest oil producer and consequently the swing producer, a position that was for decades held by Saudi Arabia.
But while that was going on, not much else was. The Federal Reserve’s policies of keeping interest rates at close to zero and buying huge quantities of government and commercial paper (“quantitative easing”) has led to nothing more than a gigantic excess of liquidity in a financial market where savers are not saving because they cannot get a decent return and investors are not investing because of a lack of anything to invest in, partially due to a precipitous fall in economic innovation outside of energy. Capital expenditures never recovered to their pre-2008 level. As a result of all of this productivity has not grown and thus the market for labor has been stagnant, with large numbers leaving the job market.
As a result, real disposable income has stagnated and consumption has been correspondingly weak. With the collapse of the oil price, frackers have cut back on production, wells have been shut down and capital expenditure greatly reduced. Thus the only remaining engine of growth has stalled.
In the meantime, the public debt level continues to increase yearly, leaving little for investment in national infrastructure, which is deteriorating rapidly. Symbolized by the Amtrak derailment in Philadelphia, the country that has led the world in constructing physical infrastructure, from the great canal projects of the late eighteenth and early nineteenth centuries, through the building of the railways in the nineteenth century, and the interstate highway system and gigantic dam projects of the twentieth century, is now watching helplessly as all this infrastructure decays and deteriorates.
Instead of over-liquefying the banking system, the United States should have been engaging in major public works programs, not only aiding productivity growth but putting many people to work. For reasons hard to fathom this was not done. As a result of a dismal outlook for the American economy, Israel cannot expect that essential market to grow anytime soon.
*Norman A. Bailey, Ph.D., is Adjunct Professor of Economic Statecraft at The Institute of World Politics, Washington, DC, and teaches at the Center for National Security Studies and Geostrategy, University of Haifa.
*The original article, Israel Can’t Depend on US Recovery, was published by Globes Israel business news on June 2, 2015. © Copyright of Globes Publisher Itonut (1983) Ltd. 2015